Kwarteng Has Created A Mess - It Will Take Many Years To Clear It Up

27th September 2022

Richard Murphy writing in his blog says -

The Bank of England has only three weapons to tackle inflation. One is that it can raise interest rates. It can do this to either take excess money that's fuelling demand in the UK economy out of circulation. But, bankers apart, no one has excess money in the UK right now.

Or it can also raise interest rates to protect the value of the pound because if that value falls the cost of imports goes up and that fuels inflation. We have the pound collapsing on financial markets right now.

The second thing the Bank can do is quantitative easing (QE). QE sounds complicated but in reality it is just a ruse to hide the fact that the Bank is lending the money to a government that needs to run a deficit without it having to borrow from the financial markets to do so.

In effect, QE disguises the fact that the government is really running an overdraft with the Bank of England.

My suspicion is that if Kwasi Kwarteng does nothing today to address the crisis we are facing the Bank will be having an emergency meeting of its monetary policy committee very soon.

The only purpose for that meeting would be to increase interest rates. They could go up dramatically: something well over 1% might be likely. Even 2% would be possible, I think. Nothing like this has happened since 1992.

The result would be a disaster. Millions of UK households will not be able to pay their mortgages if this happens. Rents will skyrocket too. Renters will feel the impact very quickly. We will face an unprecedented housing crisis if rates go up like that.

Read the full blog HERE